The HR Manager's Guide to Salary Benchmarking

November 24, 2023
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The HR Manager's Guide to Salary Benchmarking

Competitive compensation might be an HR industry buzzword— but what does it really mean? 

From a candidate’s point of view, seeing this on job descriptions often means they don’t have a clear idea of what their salary might be until they get deep into the application process. 

This lack of clarity means many candidates, including the top talent, won’t apply for jobs that only specify a “competitive salary.” 

A better alternative is creating salaries that are genuinely competitive in the true sense of the word: Transparent, realistic pay, matched to market rates for your industry and location. 

We get it — that’s a bit more of a mouthful, not to mention more work to implement. But pivoting to this strategy can transform your ability to attract top talent, plus boost your employee retention, motivation, and performance. 

The key lies in salary benchmarking — and we’re here to show you how it’s done.

What is salary benchmarking? 

Salary benchmarking involves comparing the salaries for roles at your company to others in the same industry or location.   

But why has it become such an important cornerstone of HR, and how do you benchmark a salary in the first place? Let’s find out. 

Why benchmarking salaries is important

These days, salary benchmarking is a key HR strategy that allows companies to stay ahead of the competition. Here’s what it helps achieve:

  • Aligning with the market: Knowing where your salaries sit within market standards is crucial. This knowledge helps you make the most of your budget while remaining competitive within your industry and location. 
  • Attracting top talent: If your total compensation packages are competitive for your industry, the chances of attracting top talent are far higher. Most candidates are applying for multiple roles, and salary is a key consideration. 
  • Boosting employee retention: Benchmarking helps confirm if an employee’s salary is fair — and if not — allows you to do something about it. Regularly reviewing salaries and adjusting them when necessary also makes it more likely that employees will continue in their roles.  
  • Encouraging engagement and motivation: Having a transparent compensation philosophy (that includes benchmarking) demonstrates to your employees that their salaries are fair, but also carefully considered. This can help boost trust which in turn, can enhance engagement and motivation. 
  • Promoting internal equity: Salary benchmarking isn’t just crucial for external candidates. It also helps ensure internal equity by confirming if employees in similar roles are being paid the same. 
  • Ensuring legal compliance: Labour laws and regulations like the EU Pay Transparency Directive require companies over a certain size to publish salary information. Benchmarking is a key part of a transparent compensation policy that complies with these kinds of regulations. 

Salary benchmarking is also an important element of a data-driven compensation philosophy — with reliable, objective information at the centre.  

Making decisions around compensation strategies, performance reviews, budget allocation, and the positioning of your company within the talent market is made much easier when you have access to high-quality data. But where do you get that data from?   

Salary benchmarking tools

Many companies used to rely on industry salary surveys, occupational surveys, government labour statistics, and review sites like Glassdoor to collect salary data. They might even trawl job boards and competitor adverts to find out salaries for comparable roles. 

But these days — there’s a better way.

Salary benchmarking tools are the way forward. Rather than rely on data that’s potentially inaccurate or out-of-date, these tools are designed to quickly collate reliable, accurate salary data, that’s updated in real-time. 

Choosing a tool that also offers filters by industry, location, company size, and more means your results will be as accurate as possible. 

It also makes things much easier when the time to benchmark your salaries rolls around again. 

Talking of which — here’s how to carry out your salary benchmark process — step by step. 

How do you conduct salary benchmarking?

Using a salary benchmarking tool is the easiest, quickest, and most accurate way to complete the benchmarking process. Let’s explore what that process looks like. 

1. Decide on your benchmarking goals 

The very first step of benchmarking is deciding what goal you’re working towards. Is your number one goal to attract top talent, regardless of location? Or are you hoping to ensure internal equity? Defining these goals now will help focus your efforts during this process. 

Creating a salary benchmarking plan helps clarify your goals, and makes it easier to inform leaders and stakeholders of what to expect. Make sure to cover:

  • Short- and long-term goals
  • Timeline for completion
  • Budget 
  • How often the benchmarking process will be repeated

2. Choose which benchmarking method to use

Choosing an accurate method is crucial. The data on sites like Glassdoor can be inaccurate, while data from government labour statistics or compensation surveys might already be outdated by the time it’s released.

That’s why we recommend choosing a salary benchmarking tool, like Figures, that offers access to real-time, verified data. 

Each benchmarking tool has its unique capabilities and features, so make sure whichever one you choose can help you meet the goal you established in Step 1. 

Some factors to consider include how often the data is updated, where it’s sourced from, and if it’s filterable. Location also matters too, so if you’re based in Europe there’s no point using salary benchmarking UK data because it won’t be as relevant. User reviews can also help uncover whether a specific tool can meet your needs. 

We also recommend using a tool that places a high priority on data protection. Look for a tool that is GDPR and SOC2 compliant. Figures is the first European Compensation Management solution to be ISO 27001 certified, which means we uphold the highest information security standards. 

3. Collect your internal data 

During this stage, you’ll need to collect all your internal data. To ensure you’ve got a clear understanding of your organisation’s compensation structure, we recommend:

  • Gathering job descriptions, plus the required qualifications, skills, and experience for each of these.
  • Collecting salary data for each role.
  • Collecting total compensation data for each role.
  • Assessing the company structure, including reporting relationships and career development paths. 

4. Analyse your data 

Now you have your chosen benchmarking method and collected your data — it’s time to analyse. Look for areas where your salaries fall too high above, or too low below market rates. 

At this stage, it’s also important to define salary bands, if you haven’t already done so. These define the range of salary for each role, typically using the market average as a mid-point. 

Salary bands help ensure that all employees are compensated fairly, but also help you maximise your budget because you know the minimum and maximum salary for every role. 

HR, finance, and leadership teams will need to approve these changes before they’re implemented. It’s also a good idea to create a compensation communication plan to keep employees informed during the benchmarking process. 

They may be concerned about the impact of this on their salary, and a little reassurance can go a long way. For example, you might decide to reassure employees that no one’s salary will be decreasing and that their managers and HR are available to answer any questions. 

Using accurate data is an essential part of the benchmarking process so that you can ensure compensation decisions are both competitive and compliant with regulations.

Once that data has informed the initial benchmarking process, you can start to make decisions about creating fair and competitive compensation packages.  

Using Benchmark Data for Compensation Decisions 

The first time you complete the salary benchmarking exercise there can be a lot of administrative tidying up to be done. 

You’ll need to decide on your market positioning, and where your salaries should fall along this scale. This will be informed, in part, by your company’s location, size, and industry. Benchmarking can help you uncover what your competitor's salaries look like, then you can decide where to position yours in comparison.  

It’s also important to make sure any benchmarks are in line with your organizational goals. If you’re a startup entering a period of hypergrowth, strategically positioning your salaries to be above the average market rate can help attract top talent with the potential to drive business growth. 

If your company includes employees on an OTE salary structure, knowing where to position the base salary is also crucial. Setting a realistic base salary, and combining this with high sales commissions and bonuses can help attract top talent who are confident in their ability to exceed their quotas, while still maximising your budget.  

During the benchmarking process, you may uncover some employees who are being paid less than others in a comparative role. By proactively adjusting lower salaries, you can move towards internal equity, a key element of truly competitive compensation.  

How to communicate these pay decisions to your employees should be laid out in your compensation communication plan. Decide what you’re going to share with employees, and who will communicate this. 

Once each employee’s salary has been benchmarked (and adjusted if necessary), creating a compensation statement is a good way to outline what each employee receives as part of their total compensation. 

Market competitiveness and salary equity 

Salary benchmarking gives companies a competitive edge — not just when it comes to their competitors. Employees are increasingly looking to work for companies with cultures that align with their values.

Market competitiveness

All companies need to stand out, and salary benchmarking helps achieve just that. 

By knowing where you stand in comparison to your competitors, it’s easier to set salary ranges that align with market rates. If your company is within a crowded market in a popular location, setting salaries slightly above the market average can help attract top talent while still maximising your budget. 

If your industry is more niche, and employees can work from anywhere, you can set slightly lower salaries while still attracting high-performing employees. 

For existing employees, knowing their salaries are not only fair, but will be adjusted according to market rates in the future, is a powerful motivator. Replacing employees can be a costly exercise, so focusing on retention by paying a competitive salary is a sensible strategy.  

Benchmarking also helps you adjust to evolving market trends, allowing you to adapt faster than the competition.  

Salary equity

For employees, pay transparency matters, with 60% saying they’d be willing to change jobs if it meant working for a company with a transparent pay structure.

And that’s because everyone wants to know they’re being paid fairly — something we can all relate to! 

Creating pay benchmarks and ensuring pay parity offers a great return on investment. Transparently analysing salaries and proactively ensuring employees in similar roles are being compensated equally is an objective way to achieve pay parity, compared to expecting employees to ask for a raise themselves. 

Some employees may perform exceptionally well and never ask for a pay increase, while others may not perform as well but because they asked for a raise, they end up on a higher salary. Pay benchmarking helps avoid this scenario, which in turn can boost retention and motivation. 

Salary benchmarking also helps address any pay gaps due to demographics like gender and ethnicity. Using salary benchmarking as part of a fully transparent compensation policy helps drive equal pay — something that all companies should be working towards.    

How can you implement an effective salary benchmarking system?

Salary benchmarking might seem like a complex and laborious process — but it doesn’t have to be.

Choosing the right benchmarking tool can help streamline the process plus offer powerful compensation insights. 

And, seeing as this process is something you’ll need to repeat annually, it makes sense to choose a tool that can give you the whole picture. 

Ready to start your salary benchmark journey? Get in touch today and find out how Figures can help. 

FAQs 

Why is salary benchmarking important?

Salary benchmarking helps companies ensure their salaries are in line with market rates. If salaries are too low, companies run the risk of struggling to attract and retain top talent. But on the other hand, if they’re too high, this can adversely impact their budget. 

By knowing the salaries for comparative roles at other companies, you can determine if your salaries are fair. Salary benchmarking also helps boost trust, because you can demonstrate your pay practices are both transparent and robust. 

How often should salary benchmarking data be updated?

Ideally, salary benchmarking should be carried out annually. This allows you to update your salaries as the market fluctuates. 

If you identify any roles with high employee turnover, or where you’re struggling to attract talent from a limited pool of qualified candidates, it’s worth revisiting the salaries for these roles more frequently. 

Exit interviews and candidate feedback can help uncover if the salary for these roles is a barrier to attraction and retention.  

How can organisations ensure the accuracy of their benchmarking data? 

Accurate data is essential to a successful salary benchmarking process. Relying on self-reported data collected from sites like Glassdoor isn’t the best strategy, because this data is often inaccurate and out-of-date. 

Instead, using a compensation management platform ensures that your data is reliable. Data from these platforms can usually be filtered by industry, location, job level, and more, making your results as accurate as possible.  

Ready to start your salary benchmark journey? Get in touch today and find out how Figures can help. 

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